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SEC settles with 36 firms over municipal bond sales

The Securities and Exchange Commission Thursday charged 36 underwriting firms with selling municipal bonds that failed to include adequate financial disclosures for investors. The alleged violations, self-reported by the underwriters, occurred between 2010 and 2014 and involved units of several major banks, including Citigroup Global Markets, J.P. Morgan Securities, Morgan Stanley and Bank of America’s Merrill Lynch subsidiary, the SEC said.

The companies collectively underwrote more than 70% of all U.S. municipal bond offerings during the last four years, the SEC said. The companies neither admitted nor denied the allegations, but agreed to settlements that require them to pay fines ranging from $60,000 to $500,000. “The settlements announced today reflect these underwriters’ cooperation in self-reporting their own misconduct and agreeing to improve their procedures going forward,” said LeeAnn Ghazil Gaunt, chief of the SEC enforcement unit’s municipal securities and public pension unit.

“Because these 36 firms underwrite a substantial portion of the country’s municipal bonds each year, we expect a large number of bondholders will benefit from the resulting improvements in due diligence and disclosure,” added Gaunt. The violations involve the $3.7 trillion market for municipal bonds, offerings typically issued by state or local governments to fund long-term construction and other extended projects.

Investors in the lightly-regulated market don’t receive quarterly reports or other filings about their investments, said Andrew Ceresney, head of the SEC’s enforcement division. Instead, they rely on bond issuers and underwriters to inform them about significant financial issues with the municipal bonds on a continuing basis. The underwriters involved in the settlement used offering documents that contained materially false statements or omissions about the issuers’ compliance with the ongoing disclosure requirement. The SEC also alleged the underwriters failed to conduct the due diligence checks necessary to identify the misstatements or omissions before offering and selling the bonds to customers.